By Dave Graham and Oliver Hirt

ZURICH (Reuters) - Swiss prosecutors on Friday indicted private bank Lombard Odier and one of the firm's former employees for "aggravated money laundering", in a rare charge of such magnitude against one of Switzerland's biggest and oldest wealth managers.

The bank and the ex-employee are suspected of having played a decisive role in enabling the concealment of the proceeds of a criminal enterprise allegedly set up years ago by Gulnara Karimova, daughter of the late president of Uzbekistan, Islam Karimov, the Swiss Attorney General's Office (OAG) said.

Lombard Odier denied wrongdoing and said the investigation in question began after it had itself reported suspicions to Swiss authorities in 2012. Swiss authorities said in 2017 they had opened an investigation into the case.

"The allegations are unfounded and without merit and are firmly rejected by the bank," it said in a statement, adding that it had fully cooperated with authorities throughout.

Karimova, who is currently in prison and was indicted by the Swiss OAG last year over alleged participation in a scheme at the centre of the case, could not immediately be reached for comment. She has previously denied those allegations. 

Geneva-based Lombard Odier, which dates back to 1796, reported total client assets of 296 billion Swiss francs ($336 billion) at the end of last year.

"It's highly unusual for a bank to be charged," said Peter V. Kunz, a professor of business law at the University of Bern.

Kunz said the allegations were damaging for Lombard Odier irrespective of the outcome. Under criminal law, the bank faced a fine at most, although further sanctions could be applied by regulators if the case led to a conviction, he said.

Banking secrecy was once the cornerstone of Switzerland's prowess in wealth management, but that stronghold has been gradually eroded under international pressure, making it harder for people to use the country to hide their wealth.

The OAG alleged Lombard Odier failed to comply with anti-money laundering standards and its own internal guidelines in opening and managing nine bank accounts under suspicion.

Prosecutors filed the charges against Lombard Odier just a few days after Credit Suisse, which is now a part of UBS, was acquitted of failing to prevent money laundering by a Bulgarian cocaine trafficking gang, overturning a 2022 conviction.

Dominik Gross, an economic historian at Swiss NGO Alliance Sud, said the indictment was the latest in a growing series of setbacks for the country's financial sector, even if it alone looked unlikely to do serious damage to Lombard Odier.

"A private bank is less exposed to the markets than was the case with Credit Suisse," he said, noting how scandals gradually sapped confidence in Credit Suisse, which collapsed in 2023.

Swiss prosecutors said Karimova and another person are suspected of participating in a criminal organisation known as "The Office", which operated in several countries, and of laundering proceeds in Switzerland, between 2005 and 2012.

The operation allegedly channelled hundreds of millions of dollars worth of bribes from telecoms companies.

The OAG believes part of the laundered money may have been transferred using bank accounts at Lombard Odier in Geneva.

The ex-employee worked at the bank's private clients' section between 2008 and 2012, and is suspected of having opened or arranged for the opening of the nine accounts, it said.

Karimova, 52, is presently in prison in Uzbekistan, after being jailed in 2019 for violating the terms of her house arrest and receiving a sentence in 2015 on charges of embezzlement and extortion. She was handed a further sentence in 2020.

($1 = 0.8808 Swiss francs)

(Reporting by Dave Graham and Oliver Hirt; Additional reporting by John O'Donnell and Naomi Rovnick; editing by Rachel More, Jason Neely, Daren Butler and Susan Fenton)